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The coming wave of disruption in financial services

Matt Lipton, CFA, Portfolio Manager
2022-08-31
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The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

I believe we’re at the beginning of a decade-long (or more) cycle of disruption and structural change in the financial services sector. We’ve seen structural change across many sectors in recent years, but financials are “late to the party,” with the global financial crisis and its aftereffects having put innovation and disruption on a long pause. Now, though, I think the change is coming, fueled by several key drivers — and with the growth in digitization and other trends during the pandemic serving as a massive accelerant.

  1. The adoption of big data and cloud computing. This may be a universal theme across many sectors, but it’s early days for financial services. Based on our research, we estimate that 5% of banks can open an account online for a customer from end to end, and we believe that big data and the cloud will unlock a solution for a much larger customer base.1 The online mortgage process is another area that doesn’t work well, with far too many manual steps still required and many opportunities to digitize the workflows as new technologies take hold. Insurers, for their part, are only just beginning to incorporate big data in areas like their underwriting processes.

    In time, we should see a near-total rewiring of the financial infrastructure. I think it will touch many industries, including the service providers and back-office software companies serving financials, and leave numerous “haves and have-nots” among the incumbent banks and insurers.

  2. The democratization of financial services. More than 60 million Americans are underserved by this sector, lacking access to good financial services in areas like credit and checking accounts.2 But so-called neobanks and tech companies can use digital and mobile technologies to create better user experiences in banking services, access to credit, and investment capabilities — and we believe they can do all of this faster and cheaper. 

    Neobanks, for example, can acquire a customer at about a third the cost of a traditional bank but still potentially derive the same lifetime revenue per customer. From an incumbent’s standpoint, that’s a very dangerous formula. All of this is driving market-share shifts in deposits, lending (auto, mortgage, consumer), and brokerage assets away from the incumbents.

  3. Financial inclusion in emerging markets. This opportunity is not limited to the US. We’re seeing fintech-related disruption in big population centers like India, Indonesia, and Brazil. It’s creating a more level playing field for the “underbanked” and helping to reprice financial products. Many incumbent financial institutions have still not invested in tech and yet offer poor access and high prices. That’s starting to change, with fintech companies finding innovative ways to offer more reasonably priced products to emerging market consumers and taking share from incumbents.

Importantly, this is a vast opportunity set with thousands of public and private incumbents and disruptors, and it’s still developing. We think there will be over 100 IPOs of fintech companies over the next 24 months, for example. In other words, the groundwork is just being laid for many innovative companies to build their businesses, and the resulting disruption will leave both winners and losers in the market for investors to sort through in search of opportunity.

Authored by
lipton matt
Matt Lipton, CFA
Portfolio Manager
Radnor

1Source: Wellington Management, 2021.

2Source: Federal Reserve, 26 March 2021, Economic Well-Being of US Households.

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All figures are for the Wellington Management Group of companies as at 30th June 2022.
Past performance is no guarantee of future performance and can be misleading. Funds returns are shown net of fees.
Source: Wellington Management

Investment in the funds described on this website carries a substantial degree of risk and places an investor’s capital at risk. The price and value of investments is not guaranteed and can go down as well as up. An investor may not get back the original amount invested and an investor may lose all of their investment. Investment in the funds described on this website is not suitable for all investors. If an investor is in any doubt as to the suitability of an investment in a fund, an investor should consult an independent financial advisor. The information on this website does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell or otherwise transact in any security including, but not limited to, shares in the funds. An investor should only invest in a fund once that investor has carefully read and understood the offering documents for the relevant fund, which are the relevant prospectus, and Key Investor Information which contain further information on the risks and features of the fund, and the latest financial reports and any other offering documents for the fund which are available on this Website. Unless stated otherwise data is as at previous month end.

All figures are for the Wellington Management Group of companies as at 30th June 2022.
Past performance is no guarantee of future performance and can be misleading.
Funds returns are shown net of fees.
Source: Wellington Management


Investment in the funds described on this website carries a substantial degree of risk and places an investor’s capital at risk. The price and value of investments is not guaranteed and can go down as well as up. An investor may not get back the original amount invested and an investor may lose all of their investment. Investment in the funds described on this website is not suitable for all investors. If an investor is in any doubt as to the suitability of an investment in a fund, an investor should consult an independent financial advisor. The information on this website does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell or otherwise transact in any security including, but not limited to, shares in the funds. An investor should only invest in a fund once that investor has carefully read and understood the offering documents for the relevant fund, which are the relevant prospectus, and Key Investor Information which contain further information on the risks and features of the fund, and the latest financial reports and any other offering documents for the fund which are available on this Website. Unless stated otherwise data is as at previous month end.